Lease vs. Loan

When comparing lease vs. loan for the lowest rates, it is important to understand key terminology and points. Equipment leasing companies and lease funding sources may be the best overall choice for purchasing your equipment.

Rate Structure

Most lenders prefer to loan long-term money on a floating or variable rate tied to prime, or some other indices. This places the rate risk on the borrower instead of the lender. Lease rates are fixed for the term of the lease.

Soft Costs

Soft costs are such things as sales tax, shipping, installation, training, software, etc. Most lenders are most likely not going to finance these integral parts of your equipment financing needs. Leasing is 100% financing and can cover most all soft costs.

Down Payment

Lenders typically require 10% to 20% down on most equipment financing. Once again, they are more concerned about the exposure and risk and less concerned about your practical business needs (e.g. retention of working capital). Leasing is 100% financing and rarely requires security deposits.

Compensating Balances

Most lenders will require that you maintain certain minimum balances if you want their lowest rates. Think about this one for a second; if you maintain certain balances that they pay you no, or low, interest on, this inflates their actual yield well above your loan interest rate. Additionally, this ties up your working capital. Leasing has no such requirement.

Restrictive Covenants

Most loans contain all sorts of restrictions and covenants, such as maintenance of certain financial ratios, restrictions on future debt and salary restrictions. Additionally, look for "Call" provisions which lenders incorporate that give them the right to demand and early payoff of your loan for reasons you have no control over. Leasing has none of these types of provisions.

Revolving Loan

Lenders may classify a loan as a "Revolving" loan. This gives them the ability to extend or cancel the loan on a yearly basis. This means annual submission of Financial Statements for review and approval. Additionally, this loan is now a current liability, which really messes up your financial ratios. Leasing is fixed long term financing.

Blanket Lien on Business

Lenders take a security interest in all of your company's assets (presently owned and acquired in the future) by publicly filing a UCC, tying up all of your assets, including inventory and receivables. Leasing requires a UCC only on the leased equipment.

Disclosure

Lenders want a full financial package to help them make their own credit decision on your loan. Leasing requires a one page application that can approve a lessee up to $250,000.00 in some cases.

Lending Limits

Lenders establish a maximum borrowing limit for the company, and generally the principals also. This restricts future borrowing. Leasing offers a multitude of alternative borrowing options in addition to your company's bank borrowing options.

Credit Review Process

Most credit review processes are long and tedious, and generally drag on by requesting further financial information. Leasing usually takes 24 hours or less for an approval.

Tax Write Off

Since bank financing makes you the owner of the equipment, your only tax advantage is depreciation and interest. Lease Payments may be 100% deductible or may be a form of accelerated depreciation depending upon the lease type and your company's financial structure.